31 Oct The future of POS; or The Seven Stages of Offshore
“Last scene of all, That ends this strange eventful history, Is second childishness and mere oblivion”
William Shakespeare, The Seven Ages of Man.
The evolution of remote gambling, which began in offshore jurisdictions, now threatens to pass them by. The author is, incredibly, not old enough to remember precisely where it all started but somewhere in the Caribbean remote gambling climbed out of the primeval slime (of on-line dating agencies and worse) and began to offer sports bets and to spin three-reel slots based on little more than a residential consent. Evolutionary progress since then has been dramatic in the sophistication and enhancement of both regulatory and operator standards at the Point of Supply, but now the future of offshore appears to be endangered.
1. In the beginning, you required a power supply, some internet service, no local population worth worrying about, and a nimble legal draftsman. A raft (the right collective noun for offshore?) of licensing regimes sprang up on this basis. Their marketplace was enabled by the legal vacuum around on-line, because gambling law everywhere had been written before the internet was invented; and by U.S. appetite for sports book (PASPA and Wire Act notwithstanding). Importantly the vacuum existed in bigger economies where players had money to burn on entertainment and where fashions caught on faster than laws could be changed.
These Point of Supply (“POS”) rocks in the ocean could and did begin to compete for operator/ licensee business – and also to justify their existence – by each developing and publicizing best practice for fair gaming and player protection. The good ones were (and perhaps still are) better in these two respects than many of their essentially land-based Point Of Consumption (“POC”) counterparts, because digital information provides better and quicker evidence in almost every respect than is available to the land-based industry.
With success came broadband, bigger fibre pipes and upgraded redundancy provisions for power supply. Free trade, universal (satellite) access across borders and best practice regulation – this was Milton Friedman’s definition of paradise. What could go wrong? Well, the biggest issue was tax.
2. Historians may point to the U.S. Department of Justice’s actions against the U.S.-facing poker hubs as the first hole in the virtual wall protecting POS regimes. What drove these actions may not have been tax; very probably it was the political ambitions of the prosecutors, enabled by the quite extraordinarily effective vested interests behind the UIGEA legislation. However, an even bigger cloud blew up at about the same time in Europe, where the EC’s fundamental principle of common access to a single market across all member states, to properly licensed operators in any one member-state, was rapidly abandoned as the size of the POS threat, and of the missed opportunity, was realised. The threat posed by POS licensure was to local monopolies, classically to the state lottery and/or the state tote. The missed opportunity was the domestic tax take, which became a critical issue in the recession following the financial markets collapse of 2007/8.
3. The steady practical decline for POS operators in their market access – USA, France, Spain, Italy – across several years, probably only became critical with UK’s introduction, within the last two years, of a POC licensing regime. Whatever reasons were given to justify this development (and some of them were contentious, as Gibraltar is still intent on demonstrating at the European Courts of Justice), it has removed the biggest legitimate market in the world from operators licensed only in a POS regime.
4. If the death knell for POS was rung in the UK in 2014, it is echoing elsewhere in 2016. The Northern Territories jurisdiction is onshore in Australia but it’s far enough removed from the centres of population to have built up a successful POS regime within that federation; and to have hit the same issues as offshore. According to Australian Senator Xenophon, the jurisdiction doesn’t contribute to the mess, in terms of player protection, that it makes at the point of consumption. Whilst this is demonstrably true, the POC licensing initiatives emerging in S. Australia and elsewhere are largely driven by state budget issues and the prospect of a quick revenue fix; and the absence of regulatory skill and depth is not seen as critical. So the POS regimes of Norfolk Island, Tasmania and Northern Territories, with no local market to supply, are now directly threatened.
An early step for a newly emerging POC regime involves the erection of fencing. So the slow and careful development of a POC remote licensing regime in the Netherlands has now progressed to the point where it can turn the spotlight onto unlicensed market access. Given that almost no-one who isn’t Dutch speaks Dutch, offshore sites in Dutch language are self-evidently illegal; which is bad news for the POS jurisdiction of Curacao. Its licensees also face S. America and other markets, and it is technically an independent state. Yet its dependent territory status as a former province of the Netherlands, and its complete lack of regulatory presence, may put it on the endangered list, at least in its present form.
The global reach of Kahnawake’s licensees has likewise been curtailed very recently, albeit by different means. That sovereign nation is reliant on one data centre from which to base licensee activity. Thus the owner’s licence application to the state of New Jersey presented a simple means to block illegal access through its agency to any U.S. resident players. It represented a clear cold commercial calculation of the value of future on-shore business against that of current off-shore business.
5. Interaction and complexity of regulations covering gambling itself, financial services, AML and data protection, are now choking operators’ compliance resource. The obligation on financial service providers to know their customers used to be sufficient protection for remote operators, who accepted and returned their customers’ money using only same-named accounts at regulated banks and payment providers. What could be called the Al Qaeda effect has led to a dramatic increase in AML compliance requirements on “customer-not-present” businesses like remote gambling. This has coincided with multiple disparate POC regimes springing up across Europe within a few years, unconnected by any consistent agreement of best practice regulation in other respects than AML. So where ten years ago an operator could quite properly service most of Europe from one POS-licensed site with one compliance officer and one set of Terms & Conditions, the myriad similar but different requirements – for systems testing, data retention, complaints services, player Identity verification, capital and so on – mitigate against any licence which is only marginally commercial.
Ironically this failure to develop common regulatory standards has at its roots the POS jurisdictions’ need to compete with each other for business, which obstructed agreement on and delivery of best practice. There is some indication that the bigger European POC regulators are now addressing the industry’s crying need for a unified statement of best practice compliance. But the initiatives, such as they are, are being taken without reference to offshore authorities and may serve as another nail in that coffin.
6. What an offshore e-gambling business can continue to offer today could be summarised as niche, loophole and tax. A POS-licensed B2B hub, serving associated POC licenses with common product on an efficient transfer pricing model and from a tax-neutral base makes sense from a tax angle for as long as the world accepts the validity of carefully structured tax avoidance.
However, the political posturing and confusion around what tax structuring is acceptably within the law, what is unacceptably aggressive and what is simply illegal evasion will only grow. The target of OECD’s “Base Erosion and Profit Shifting” initiative in 2014 was specifically the artificial movement of multinationals’ profits into low-tax or no-tax jurisdictions. Seen as a failed initiative, it was given another kick into life at the G20 Hangzhou summit last month. Although not (yet) aimed at remote gambling business, it is not likely to go away and it is not likely to miss lucrative targets.
Likewise, the “use and enjoyment” direction in which VAT legislation is evolving (by which the consumer’s location becomes the point of taxation) directly threatens those POS jurisdictions such as Gibraltar that have in the past gained advantage from putting licensees’ marketing budgets outside the scope of the VAT regime ruling in the markets they face.
7. New POS offshore regimes are in formulation – Bermuda, Barbados, Bhutan, Jersey, Seychelles – at the same time that major population centres are building POC regimes. Some existing POS regimes prosper and Malta is the current case in point, looking more secure in its European access than ever following UK’s Brexit-based threat to the Gibraltar jurisdiction. Even here there are signs that EC bureaucracy is choking off some of Malta’s marketability.
For example, EC’s Convention on the Manipulation of Sports Competitions’ draft wording requires member states to identify ‘illegality’ of betting activity of their licensed institutions, potentially striking right at the heart of Maltese operators’ grey market activity. Europe is anyway getting ever smaller, in the sense that Germany is the only significant EC population block not POC-fenced; and not many would bet on that federation remaining locked in its present muddle for ever.
There are still large consumer jurisdictions that don’t have overseas “locus” or legislative reach to block e-commercial activity from offshore – Canada, China, Russia, Australia, Brazil, India and much of sub-Saharan Africa all fall to some extent into this bracket today, in respect of remote gambling. Although their world has shrunk, grey market operators, POS-licensed and located offshore, can and do continue to offer their product commercially and successfully – for as long as the POC nations permit it and for as long as the POS regulators can justify it, or withstand the pressures that their activity incurs.
The future of Offshore may not be as bleak as the seventh age prediction of Shakespeare; there are still advantageous strategies linking offshore to market, plainly evidenced in the quoted sector; but the second decade of “Offshore” is clearly going to finish in a different place than it began.